Nigeria Outlook H2-18: Caught Between Two Stools

Entering H2-18, the harmonized global growth of last year is fizzling out amid trade tensions between the US, China and most of the advanced economies. Economies of commodity-exporting countries are poised to strengthen as demand and supply dynamics continue to favour gradual uptick in prices. However, policy normalization in the US is rattling financial markets with currencies of emerging and frontier economies taking the most hit.

According to the World Bank’s mid-year revised projections for 2018, 45.0% of countries are expected to experience further acceleration compared to 56.0% in 2017. Furthermore, growth in advanced economies is expected to moderate slightly to 2.2% in 2018 (from 2.3% in 2017), as fiscal stimulus in the United States offsets lags in other areas. Meanwhile, growth in commodity-exporting emerging market and developing economies is expected to strengthen as commodity prices trend higher. As such, global growth is projected to remain flattish at 3.1% in 2018 and moderate in the next two years to 2.9% by 2020.

Sub-Saharan Africa (SSA): Slow growth amid rising challenges

In H1-18, SSA growth was restrained by poor momentum in Nigeria and South Africa (as at Q1-18) despite higher commodity prices, sustained global growth and increased fiscal stimulus. During the period, major economies in the region (Nigeria, South Africa, Kenya, Ivory Coast, Ghana, Angola, and Senegal), all approached the Eurobond market, issuing a total of $15.2bn.

However, foreign exchange conditions weakened against the US dollar as portfolio funds reversed on the back of rising U.S treasury yields. A major milestone for the region during H1-18 was the endorsement of the African Continental Free Trade Area (AfCFTA) by 44 of the 55 African Union member countries, to promote intra-African trade and accelerate regional integration.

That said, economic outcomes were divergent across the region as output recovery in Nigeria moderated in Q1-18 owing to relapse in critical non-oil sectors. Also, despite clarity in the political climate, South Africa recorded a broad-based slowdown in Q1-18 as GDP growth eased to 0.8%y/y driven by an underwhelming performance in the manufacturing and mining sectors. In H2-18, the build-up to 2019 election in Nigeria, upticks in commodity prices and weak policy implementation, are the key factors to watch. Nonetheless, the ratification of the AfCFTA by individual member countries portends a positive outlook for the region beyond 2018.

Nigeria: Caught between two stools

Macro variables in the Nigerian economy moved in tandem with our expectations in H1-18. Q1-18 GDP sustained gradual recovery, up 1.95%y/y. Headline inflation rate moderated to 11.6% in May-18. FX rates were broadly stable across segments as external reserves surged, adding $9.0bn from Jan-18 to Jun-18, settling at $47.8bn. Furthermore, oil prices surprised positively, averaging $71.0/b relative to our projected $55.0-60.0/b for the year. Monetary policy stance was less hawkish, though policy rates were held unchanged throughout the period.

However, fiscal policy remained aggressive as the second tranche of the $5.0bn Eurobond approved by the national assembly in 2017 was issued in Feb-18 while the Voluntary Asset and Income Declaration Scheme (VAIDS) deadline was extended till Jun-18. Unsurprisingly, the 2018 Budget was delayed till June.

Going into H2-18, we expect pre-election politics to take center stage. We anticipate a choppier socio-political outlook as the usual electioneering cycle plays out again. Nevertheless, recovery in the broader economy is expected to improve, thanks to conditions in the oil market which continue to support Nigeria’s external trade balance, government revenue, business, and investor optimism.

The downside risk to stronger growth include the clashes between Herders and Farmers, which dragged Agriculture sector GDP in Q1-18, as well as a potential oil output volatility. Accordingly, we have adjusted our FY-18 GDP growth forecast to 2.3%. Inflation rate is likely to creep back to 12.9% by year-end averaging 12.6% for the year. We think events in the local and global economy do not favour a rate cut in the immediate term, hence, we expect the MPC to keep rates unchanged in H2-18. FX rate should remain stable despite political risk, thanks to a robust external reserves position which is enough to cover c.12 months of import.

Also, mop-up exercise by the CBN should increase as fiscal and political spending rises. Accordingly, the overall theme for the Nigerian economy in H2-18 hangs on a balance between uncertainties around global geopolitical/local pre-election uncertainties and investor optimism about the gradual improvement in the macroeconomic space. As such, we note that the outlook for the Nigerian economy in H2-18 is “Caught between two stools”.

Naira Assets: A wobbly finish to a stylish start

As against the stratospheric start to the year, Nigerian equities closed H1-18 flattish, up 0.1%, as foreign portfolio investors took a flight to safety in Q2-18. The fixed income market witnessed a moderation in yields (down 69bps) compared to Dec-17 as the CBN scaled down on OMO mop-up and the DMO opted for funding from the international debt market to average down cost of debt servicing and incentivize corporate issuers in the local market. In H2-18, we highlight that geopolitical and pre-election uncertainties in the global and domestic economy may offset the anticipated improvement in the macroeconomic space.

Thus, we revise our return estimates for the equities market to 4.6%, predicated on improved corporate earnings and the implementation of new Multi-Fund Structure for PFAs by PENCOM. For fixed income securities, the CBN would likely become more aggressive with OMO sales to keep naira assets more attractive and maintain FX stability. Amplified by the play of political uncertainties and fears of rising US interest rates, we expect a slight uptick in the yield environment.

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